The role of the wealth distribution on output volatility
We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non-linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility. When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution. Finally, we note that such a clear result is at odd with the existing related literature.
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